How Will the US Dollar Perform in January?
Every currency trader tries to handicap the future direction of the market and they do so using a variety of methods, the most prominent of which are fundamental and technical analysis. From both schools of thought, the most popular view at the moment is for further dollar weakness in 2007. Central banks from around the world have already begun to diversify out of US dollars in fear of lower interest rates in the months to come.
After seven months of tight range trading, the US dollar broke down and has embarked on a major new trend since late November. However, even though both fundamentals and technicals favor further dollar losses in 2007, the dollar could strengthen before it weakens. Prices move in repeated patterns which is the foundation behind technical analysis. Therefore it should be no surprise that there is a unique repeated pattern in the performance of the US dollar in the month of January based upon seasonality.Â
Euro/US Dollar (EUR/USD)
– Over the past 10 years, historical analysis indicates that from January 1st to January 31st, the Euro fell against the US dollar 8 out of 10 times, which is roughly 80 percent of the total sample. In other words, 80 percent of the time, the dollar strengthens in January. There are many reasons to explain this unique seasonality, the most of obvious of which may be beginning of the year repositioning. Typically many foreign investors will repatriate their money year end to dress up their balance sheets or prepare distributions. In the beginning of the year however, they reinitiate new positions and typically that will involve reweighing their investments in US equities and bonds. Therefore even though 2007 may be a tough year for the US dollar, it could at least start the year on a firmer footing.
US Dollar /Swiss Franc (USD/CHF)
– The relationship between the US dollar and the Swiss franc is just as strong. The US dollar has strengthened 8 out of the past 10 years against the franc. This is hardly surprising given the inverse relationship between the EUR/USD and USD/CHF. Losses (-2 percent) have also been on average smaller than the gains (3.14%). Even though dollar strength is still dominant against the Japanese Yen and British pound, the relationship is not as strong. The US dollar has only increased 7 out of the past 10 years against the Yen and 6 out of the past 10 years against the Euro. Part of the reason for this divergent price action is because for the Yen, carry trades can alter the landscape. The British pound however also benefits from the popularity of the UK markets. Beginning of the year positions tend to be initiated in both the US and UK financial markets.Â
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.